The euro zone could break up in wake of the crisis caused by Greece's debt woes, says former Federal Reserve Chairman Paul Volcker.
“You have the great problem of a potential disintegration of the euro,” Volcker said in a speech Thursday in London.
“The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.”
European nations have arranged $1 trillion in aid to prevent Greece's debt problems from spreading further across the continent and into the rest of the 16-member euro zone.
Before the crisis, the euro had been good for Europe, Volcker says. If the euro zone's member nations want to keep it going, they will need to better align economic policies, he says.
“There is strong opinion to keep it going,” Volcker told Bloomberg.
“That does require, I think, changes in the structure of European economic policy,” said the 82-year-old former Federal Reserve chairman (1979-1987).
“Will economic and financial distress finally be resolved by looking toward more integration in a closely integrated Europe, politically as well as economically?” asks Volcker, the White House economics adviser who crafted a proposed ban on proprietary trading by banks.
“I do have my hopes, as a believer in the euro,” said Volcker, who tamed soaring inflation in the 1980s.
European policymakers are also concerned that countries such as Spain, Portugal Italy and Ireland are facing tough debt woes.
While Greece and Spain are working to implement austerity measures, Portugal is following suit by raising taxes and cutting public-sector wages.
Prime Minister Jose Socrates said the country would impose extraordinary income taxes of up to 1.5 percent, hike value-added tax by 1 percentage point to 21 percent and raise a 2.5 percent tax on large companies and bank profits, Reuters reports.
“I ask all my compatriots for us to make this effort to defend the country, to defend the euro and Europe,” says Socrates.
Meanwhile, German Chancellor Angela Merkel says it’s crucial that the euro and Europe itself both survive.
"If the euro fails, not only the money fails, but also Europe and the idea of European unity," she said Thursday.
The chancellor asked European countries to fight for the stability of the euro-zone currency, saying governments had promised stability and "we have to keep” this promise.
"The crisis of the future of the euro is not a crisis like any other, this is the toughest test passed by Europe since 1990 except for 35 years," she said. "This test is existential, it must be managed successfully," she said.
She said she is optimistic that Europe would be able to overcome the current financial crisis.
European policymakers had breathed a sigh of relief earlier this week that their "shock and awe" package had helped to shore up confidence in the shared currency.
Though the package has helped ease concerns of a wave of imminent debt defaults within the 16-country euro zone, currency traders are realizing the underlying problem has not gone away — how are the highly indebted countries going to get their public finances under control?
Those fears are unlikely to have been eased by comments made by Argentina's President Cristina Fernandez, who reportedly said earlier this week that the bailout will fail as the measures were a replica of the "recipes they applied to us, which provoked 2001" — a reference to the world's biggest sovereign debt default, by Argentina.
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